(Written by Bert Dohmen, contains excerpts from our latest Wellington Letter published on June 9, 2024)
The big AI stocks had some nice gains on Monday (6/11/2024). These stocks, along with AI-related firms, should be considered long-term investments. But even that sector may have a huge loss when the eventual selling starts.
AI is the greatest development since the industrial revolution. Of course, many companies won’t succeed. The letters “AI” of course do not guarantee success.
The greatest achievements in history, such as the railroad, electricity, and the telephone, had big stock flurries in their early booms, but then those stocks collapsed. The average investor lost a fortune. The original founders of those firms had made their fortunes. Read the story of James J. Hill of St. Paul who created what eventually was the Great Northern railroad.
The AI equivalent may be Jensen Huang of NVDA. He is a genius, perhaps somewhat similar to Elon Musk. NVDA has had a spectacular run, up over 1000% since late 2022. See the long-term weekly chart below:
NVDA had a stock split after last Friday’s market close (June 7, 2024) at a ratio of 10 new shares for every 1 old share. The last time it split (July 20, 2021), it gained nicely over the next 4 months until the November 2021 market peak. Then, the 2022 bear market in stocks demolished it.
Our work on the general market suggests this might happen again.
The leaders of the rally continue to be the strongest performers. The NYFANG Index, comprised of 10 mega-cap tech stocks, continues to lead the charge, outperforming all other indices this year.
On the 2-day chart of the NYFANG Index below we see it tested support from the March and April highs on May 31 (green horizontal line), then bounced off that level to break out and set a new all-time high yesterday, June 11.
The break out to a new record high was in large part due to Apple’s big gain after their WWDC, where they announced their long-awaited strategy for AI.
The NYFANG Index has traded nicely within the regression channel since the late October 2023 low. Also notice the MACD at the bottom is still rising on its “buy” signal from the early May bottom (blue arrow).
This is why the chart of the “FANG” stocks and “Magnificent 7” may be important for active traders who try to catch shorter term moves at this part of the market cycle.
NOTE: Our Special Report from April dives deeper into the AI frenzy, AI stocks, and our top ideas on how investors can capture incredible opportunities in this market environment. We considered it so important that we are offering the report for FREE for a limited time on our website.
Currently, active investors have a great opportunity. But investors must be decisive. There will be sharp corrections in AI and related sectors. We call that “shaking the tree,” when Wall Street wants to buy the shares cheaper. There will also be sectors that do not participate in the market rally as money flows out of those sectors and into AI.
Investors must have a plan and know their own emotions. Decide now what you would do if a 20% or more decline starts in this sector or the general stock market. Would you have the fortitude to stay with it, or finally sell when the pain of daily losses gets unbearable? Every person is different.
At the height of a frenzy, investors must be able to ignore their ebullient emotions and sell. Only our “advanced technical analysis” has a chance of detecting such a top.
Of course, in AI, Nvidia should lead the charge in the next rally we expect this summer. The AI ETFs will do very well. In fact, have held a number of great performing AI ETFs in our HedgeFolios active investing models over the past several months (learn more about HedgeFolios at https://hedgefolios.com/). Semiconductor stocks and data center stocks will also participate.
However, keep in mind that the most important decision is always when to SELL Experienced investors know that stocks decline much faster than they rise. Wall Street minions usually don’t say “sell.”
If you’re interested in learning more about how you can gain an edge in the markets by following our award-winning research and analysis, we encourage you to start by reading our latest research report titled “The Artificial Intelligence Rally: How You Can Thrive In The Greatest Wealth Opportunity In Decades”.
Readers can get this 21-page report FREE for a limited time by clicking this link: Get My Free AI Report
We will continue to keep our valued members informed as the AI frenzy grows over the coming months and provide our warnings when we see a top forming, just like we did the day before the market top during the dotcom bubble on March 10, 2000.
Wishing you successful investing
Bert Dohmen
Founder, Dohmen Capital Research